Show that a perfectly competitive firm maximise its profit only when price=MC?
Answers
In Microeconomics,a perfectly competitive firm will maximize profit where market price(P) is equal to Marginal Cost(MC) because of considerably high market competition or rivalry.
Explanation:
In a perfectly competitive market characterized numerous buyers and sellers and a high level of market competition,the firms do not have any price making power or in other words,any individual firm cannot choose the market price according to its profit maximizing intentions like a monopolist.Now,because of no control over market price,a perfectly competitive firm maximizes profit at the point of production where the additional cost/expense incurred for producing one more unit of any product/service(Marginal Cost or MC) is equal to the additional or incremental revenue generated from selling that one unit in the market(Marginal Revenue or MR).Therefore,the firm will produce that much output at which MC=MR because the firm would at least want to get back the money that it spends to produce each unit of output in the form of sales revenue.Now,since the perfectly competitive firm do not have any control over the market price,it has to accept whatever price is set in the market which is equal to MR as the firm is receiving the market price from the consumers for selling each unit of the output in the market it has produced.Therefore,since market price is equal to MR,a perfectly competitive firm maximizes profit at the production level which corresponds to MR=MC or P=MC